Chapter 3
11) A firm with a low return on total assets can improve its return on equity, all else remaining the same, by ________. A) increasing its debt ratio B) increasing its total asset turnover C) decreasing its debt ratio D) decreasing its total asset turnover
A
10) A firm with a gross profit margin which meets industry standard and a net profit margin which is below industry standard must have excessive ________. A) general and administrative expenses B) cost of goods sold C) dividend payments D) principal payments
A
10) ________ ratio measures a firm's ability to pay contractual interest payments. A) Times interest earned B) Fixed-payment coverage C) Debt D) Average payment period
A
11) ________ measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends, have been deducted. A) Net profit margin B) Operating profit margin C) Gross profit margin D) Earnings available to common shareholders
A
13) When assessing the fixed-payment coverage ratio, ________. A) the lower its value the more risky is the firm B) the lower its value, the higher is the firm's financial leverage C) preferred stock dividend payments can be disregarded D) the higher its value, lesser is its reliability to pay up the debts
A
15) Using the DuPont system of analysis, holding other factors constant, an increase in financial leverage will result in ________. A) an increase in the return on equity B) a decrease in the gross profit margin C) an increase in the gross profit margin D) an increase in retained earnings
A
16) If the only information you are given about Ryan Corporation, a large public company in business for many years, is that it has a current ratio of 2.9, what could you infer from this? A) It can meet the short-term obligations without any difficulty. B) You could determine that Ryan has a liquidity problem because Ryan's current ratio is greater than 2 which is the rule of thumb for the current ratio. C) Nothing, you would also need the current ratio's from the last few years of the S&P 500 Index. D) You could determine that Ryan has an activity problem because Ryan's current ratio is greater than 2 which is the rule of thumb for the current ratio.
A
16) P/E ratio measures the ________. A) market value of the stock to earnings per share B) intrinsic value of the stock to earnings per share C) book value of the stock to earnings per share D) market price of the stock to retained earnings
A
17) Book value per share is the ratio of ________. A) common stock equity to number of outstanding common shares B) retained earnings to number of outstanding common shares C) fixed assets to number of outstanding common shares D) total liabilities to number of outstanding common shares
A
19) Present and prospective shareholders are mainly concerned with a firm's ________. A) risk and return B) profitability C) leverage D) liquidity
A
19) ________ ratios are a measure of the speed with which various accounts are converted into sales or cash. A) Activity B) Liquidity C) Debt D) Profitability
A
22) ________ analysis involves comparison of current to past performance and the evaluation of developing trends. A) Time-series B) Cross-sectional C) Marginal D) Break-even
A
23) Which of the following is used to analyze a firm's financial performance over different years? A) time-series analysis B) break-even analysis C) gap analysis D) marginal analysis
A
26) Time-series analysis is often used to ________. A) assess developing trends B) correct errors of judgment C) evaluate the value of a firm or its assets D) standardize results
A
29) An analyst should be careful when conducting ratio analysis to ensure that ________. A) the overall performance of a firm is not judged on a single ratio B) the role of inflation is ignored C) ratios being compared should be calculated using financial statements dated at different points in time during the year D) different accounting procedures are used
A
31) A firm's total asset turnover increased from 0.75 to 0.90. Which of the following is true about the given data? A) Its assets have been efficiently used to derive the optimum level of sales. B) Its assets have been efficiently used to derive the optimum level of net income. C) Its assets have been efficiently used to derive the minimum level of net income. D) Its assets have been efficiently used to derive the minimum level of gross profit.
A
31) Inflation can distort ________. A) book value of inventory costs B) market value of revenue C) market value of sales D) book value of revenue
A
32) A firm with a total asset turnover that is lower than industry standard but with a current ratio that meets industry standard must have excessive ________. A) fixed assets B) inventory C) accounts receivable D) debt
A
34) The Public Company Accounting Oversight Board (PCAOB) ________. A) is a not-for-profit corporation that oversees auditors of public corporations B) is a not-for-profit corporation that oversees managers of public corporations C) is a for-profit corporation that oversees auditors of public corporations D) is a for-profit corporation that oversees managers of public corporations
A
37) A(n) ________ provides a financial summary of a firm's operating results during a specified period. A) income statement B) balance sheet C) statement of cash flows D) statement of retained earnings
A
39) Operating profit is ________. A) gross profit minus operating expenses B) sales revenue minus cost of goods sold C) earnings before depreciation and taxes D) sales revenue minus depreciation expense
A
45) Which of the following is a fixed asset? A) land B) accounts payable C) accruals D) notes payable
A
58) A firm's year-end retained earnings balances are $670,000 and $560,000, for 2014 and 2015 respectively. The firm paid $10,000 in dividends in 2015. The firm's net profit after taxes in 2015 was ________. A) -$100,000 B) -$110,000 C) $100,000 D) $110,000
A
60) A firm has a year-end retained earnings balance of $220,000 for 2014. The firm reported net profits after taxes of $50,000 and paid dividends of $30,000 in 2015. The firm's retained earnings balance at 2015 year end is ________. A) $240,000 B) $250,000 C) $270,000 D) $300,000
A
62) Information on the accounting policies, procedures, calculations, and transactions underlying entries in the financial statements can be found on ________. A) the notes to the financial statements B) the statement of retained earnings C) the proxy statement D) the management discussion and analysis(MD&A)
A
7) The modified DuPont formula relates the firm's return on total assets (ROA) to its ________. A) return on equity (ROE) B) operating leverage multiplier C) net profit margin D) total asset turnover
A
8) ________ is a term used to describe the magnification of risk and return introduced through the use of fixed-cost financing, such as preferred stock and debt. A) Financial leverage B) Operating leverage C) Fixed-payment coverage D) Benchmarking
A
10) Other things being equal, a decrease in total asset turnover will result in ________ in the return on total assets. A) an increase B) a decrease C) no change D) an undetermined change
B
12) The ________ of a business firm is measured by its ability to satisfy its short-term obligations as they come due. A) activity B) liquidity C) debt D) profitability
B
14) Financial leverage multiplier is the ratio of ________. A) current assets to common stockholders' equity B) total assets to common stockholders' equity C) total assets to total debt D) current assets to current liabilities
B
14) The two basic measures of liquidity are ________. A) inventory turnover and current ratio B) current ratio and quick ratio C) gross profit margin and ROE D) current ratio and total asset turnover
B
15) A ________ ratio is commonly used to assess owners' appraisal of the share value. A) debt B) price/earnings C) return on equity D) return on total assets
B
20) Nico Corporation has cost of goods sold of $300,000 and inventory of $30,000, then the inventory turnover is ________ and the average age of inventory is ________. A) 36.5, 10 B) 10, 36.5 C) 36.0, 10 D) 30, 36.0
B
21) ________ analysis involves the comparison of different firms' financial ratios at the same point in time. A) Time-series B) Cross-sectional C) Marginal D) Technical
B
21) ________ may indicate a firm is experiencing stockouts and lost sales. A) Average payment period B) Inventory turnover ratio C) Average collection period D) Quick
B
22) If an inventory turnover is divided into 365, it becomes a measure of ________. A) financial efficiency B) the average age of the inventory C) sales turnover D) the average collection period
B
23) The ________ measures the activity, or liquidity, of a firm's stock of goods. A) average collection period B) inventory turnover ratio C) average payment period D) total asset turnover ratio
B
24) Which of the following is true of benchmarking? A) It is an analysis in which a firm's ratio values are analyzed to project the fundamental values of the assets for upcoming years or business cycle. B) It is an analysis in which a firm's ratio values are compared with those of a key competitor or with a group of competitors that it wishes to emulate. C) It is an analysis in which a firm's financial performance over time is evaluated using financial ratio analysis. D) It is a financial statement analysis technique which combines cross-sectional and time-series analyses.
B
27) A firm's annual stockholders' report ________. A) is only accessible to the shareholders of the firm B) summarizes and documents the firm's financial activities during the past year C) documents the list of all investors who bought the firm's shares during the past year D) summarizes and documents the firm's financial plan and budgets during the past year
B
27) In ratio analysis, a comparison to a standard industry ratio is made to isolate ________ deviations from the norm. A) greater than average B) negative C) marginal D) standard
B
27) Which of the following ratios is difficult for the creditors of a firm to analyze from the published financial statements? A) debt equity ratio B) average payment period C) quick ratio D) total asset turnover
B
28) The rule-setting body, which authorizes generally accepted accounting principles is the ________. A) IFRS B) FASB C) SEC D) Federal Reserve System
B
28) Which of the following is a limitation of ratio analysis? A) Financial ratios cannot reveal certain specific aspects of a firm's financial position. B) Ratios that reveal large deviations from the norm merely indicate the possibility of a problem. C) It is difficult to access audited financial statements for ratio analysis. D) Ratio analysis assumes that inflation has no effect on a firm's business.
B
30) The ________ ratio indicates the efficiency with which a firm uses its assets to generate sales. A) inventory turnover B) total asset turnover C) quick D) current asset turnover
B
30) The analyst should be careful when analyzing ratios that ________. A) pre-audited statements are used B) right interpretation of the ratio value is made C) financial data being compared need not be uniform D) inflation will not effect while comparing older to newer firms
B
31) The stockholders' annual report must include ________. A) common-size financial statements B) an income statement C) an advance tax statement D) the margin of safety report
B
32) The 2002 Sarbanes-Oxley Act was designed to ________. A) limit the compensation that could be paid to corporate CEOs B) eliminate the many disclosure and conflict-of-interest problems of corporations C) provide uniform international accounting standards D) provide the guidelines to minimize the tax
B
32) Without adjustment, inflation may tend to cause ________ firms to appear more efficient and profitable than ________ firms. A) larger, smaller B) older, newer C) smaller, larger D) newer, older
B
36) Total assets less net fixed assets equals ________. A) gross assets B) current assets C) depreciation D) liabilities and equity
B
41) Operating profit is known as ________. A) earnings after interest and taxes B) earnings before interest and taxes C) earnings before depreciation and taxes D) earnings after tax
B
42) Earnings available for common stockholders is calculated as net profits ________. A) before taxes minus preferred dividends B) after taxes minus preferred dividends C) after taxes minus common dividends D) before taxes minus common dividends
B
48) The ________ represents a summary statement of a firm's financial position at a given point in time. A) income statement B) balance sheet C) statement of cash flows D) statement of retained earnings
B
5) The ________ is used by financial managers as a structure for dissecting a firm's financial statements to assess its financial condition. A) statement of cash flows B) DuPont system of analysis C) break-even analysis D) technical analysis
B
55) Paid-in capital in excess of par represents the amount of proceeds ________. A) in deficit of the par value from the original sale of common stock B) in excess of the par value from the original sale of common stock C) in excess of the par value from the current value of common stock D) in excess of the par value from the intrinsic value of common stock
B
56) Firm ABC had operating profits of $100,000, taxes of $17,000, interest expense of $34,000, and preferred dividends of $5,000. What was the firm's net profit after taxes? A) $66,000 B) $49,000 C) $44,000 D) $83,000
B
59) A firm's year-end retained earnings balances are $320,000 and $400,000, for 2014 and 2015 respectively. The firm reported net profits after taxes of $100,000 in 2015. The firm's dividend payment for 2015 is ________. A) $0 B) $20,000 C) $80,000 D) $100,000
B
63) FASB Standard No. 52 mandates that U.S.-based companies must translate their foreign-currency-denominated assets and liabilities into dollars using the ________. A) historical rate B) current rate C) average rate D) rate prescribed by the SEC
B
9) A firm with a low net profit margin can improve its return on total assets by ________. A) increasing its debt ratio B) increasing its total asset turnover C) decreasing its fixed asset turnover D) decreasing its total asset turnover
B
9) ________ measures the percentage of profit earned on each sales dollar before interest and taxes but after all costs and expenses. A) Net profit margin B) Operating profit margin C) Gross profit margin D) Earnings available to common shareholders
B
12) The higher, the value of ________ ratio, the better able a firm is to fulfill its interest obligations. A) dividend payout B) average collection period C) times interest earned D) average payment period
C
12) The three basic ratios used in the DuPont system of analysis are ________. A) net profit margin, total asset turnover, and return on investment B) net profit margin, total asset turnover, and return on equity C) net profit margin, total asset turnover, and equity multiplier D) net profit margin, financial leverage multiplier, and return on equity
C
13) The financial leverage multiplier is an indicator of how much ________ a corporation is utilizing. A) operating leverage B) long-term debt C) total debt D) total assets
C
13) ________ measures the return earned on the common stockholders' investment in the firm. A) Net profit margin B) Price/earnings ratio C) Return on equity D) Return on total assets
C
15) A firm has a current ratio of 1 in order to improve its liquidity ratios, this firm might ________. A) improve its collection practices by providing extended credit policy. B) improve its collection practices and pay accounts payable, thereby decreasing current liabilities and decreasing the current and quick ratios. C) decrease current liabilities by utilizing more long-term debt, thereby increasing the current and quick ratios. D) increase inventory, thereby increasing current assets and the current and quick ratios.
C
18) Ratios provide a ________ measure of a company's performance and condition. A) definitive B) gross C) relative D) absolute
C
20) The primary concern of creditors when assessing the strength of a firm is its ________. A) profitability B) leverage C) short-term liquidity D) share price
C
24) A(n) ________ is useful in evaluating credit policies. A) average payment period B) current ratio C) average collection period D) inventory turnover ratio
C
25) The ________ ratio may indicate poor collections procedures or a relaxed credit policy. A) average payment period B) inventory turnover C) average collection period D) quick
C
28) Nico Corporation has annual purchases of $300,000 and accounts payable of $30,000, then average purchases per day are ________ and the average payment period is ________. A) 36.5, 821.9 B) 36.0, 833.3 C) 821.9, 36.5 D) 833.3, 36.0
C
29) Accounting practices and procedures used to prepare financial statements are called ________. A) SEC B) IFRS C) GAAP D) IRB
C
29) ________ are especially interested in the average payment period, since it provides them with a sense of the bill-paying patterns of the firm. A) Employees B) Stockholders C) Lenders and suppliers D) Auditors
C
30) As the financial leverage multiplier increases, this may result in ________. A) an increase in the net profit margin and return on investment, due to the decrease in interest expense as debt decreases B) an increase in the net profit margin and return on investment, due to the increase in interest expense as debt increases C) a decrease in the net profit margin and return on investment, due to the increase in interest expense as debt increases D) a decrease in the net profit margin and return on investment, due to the decrease in interest expense as debt decreases
C
33) A firm with a total asset turnover lower than industry standard may have ________. A) excessive debt B) excessive interest costs C) insufficient sales D) insufficient fixed assets
C
33) Which of the following groups of ratios primarily measure risk? A) liquidity, activity, and profitability B) liquidity, profitability, and market C) liquidity, activity, and debt D) activity, debt, and profitability
C
4) The DuPont system merges the income statement and balance sheet into two summary measures of profitability, ________. A) net profit margin, and return on total assets B) net profit margin, and return on equity C) return on total assets, and return on common equity D) net profit margin, and price/earning ratio
C
43) Which of the following is a current liability? A) accounts receivable B) cash C) notes payable D) inventory
C
44) Which of the following represents a current asset? A) automobiles B) buildings C) marketable securities D) equipment
C
46) The net value of fixed assets is also called its ________. A) market value B) par value C) book value D) intrinsic value
C
49) The statement of cash flows ________. A) shows the financial position of a firm at a given point of time. B) summarizes all the purchase and sale of fixed assets and raw materials C) provides insight into a firm's operating, investment, and financing cash flows D) classifies a firm's cash flows as operating, investing, financing, and other activities
C
54) On the balance sheet, net fixed assets represent ________. A) gross fixed assets at cost minus depreciation expense B) gross fixed assets at market value minus depreciation expense C) gross fixed assets at cost minus accumulated depreciation D) gross fixed assets at market value minus accumulated deprecation
C
57) Candy Corporation had pretax profits of $1.2 million, an average tax rate of 34 percent, and it paid preferred stock dividends of $50,000. There were 100,000 shares outstanding and no interest expense. What was Candy Corporation's earnings per share? A) $3.91 B) $4.52 C) $7.42 D) $7.59
C
7) The ________ is a popular approach for evaluating profitability in relation to sales by expressing each item on the income statement as a percent of sales. A) retained earnings statement B) common-size balance sheet C) common-size income statement D) profit and loss statement
C
8) In the DuPont system of analysis, the return on equity is equal to ________. A) (net profit margin) × (total asset turnover) B) (stockholders' equity) × (financial leverage multiplier) C) (return on total assets) × (financial leverage multiplier) D) (return on total assets) × (total asset turnover)
C
8) ________ indicates the percentage of each sales dollar remaining after the firm has paid for its goods. A) Net profit margin B) Operating profit margin C) Gross profit margin D) Earnings available to common shareholders
C
11) ________ ratio indicates that a firm will be able to meet interest obligations due on outstanding debt. A) Debt-to-equity B) Interest turnover C) Total assets turnover D) Times interest earned
D
12) ________ measures the overall effectiveness of management in generating profits with its available assets. A) Total asset turnover B) Price/earnings ratio C) Return on equity D) Return on total assets
D
13) The two categories of ratios that should be utilized to assess a firm's true liquidity are the ________. A) liquidity and market ratios B) liquidity and profitability ratios C) market and debt ratios D) liquidity and activity ratios
D
14) A firm with sales of $1,000,000, net profits after taxes of $30,000, total assets of $1,500,000, and common stockholders' investment of $750,000 has a return on equity of ________. A) 20 percent B) 15 percent C) 3 percent D) 4 percent
D
17) Which of the following is true of current ratio? A) The more predictable a firm's cash flows, the higher the acceptable current ratio. B) A higher current ratio indicates a higher return on equity. C) The more predictable a firm's current ratio, the higher the current liabilities. D) A higher current ratio indicates a greater degree of liquidity.
D
18) Which of the following is excluded when calculating quick ratio? A) accounts receivable B) accounts payable C) cash D) inventory
D
25) Cross-sectional ratio analysis is used to ________. A) correct expected problems in operations B) isolate the causes of problems C) provide conclusive evidence of the existence of a problem D) measure relative performance of a firm with its peers
D
26) ABC Corp. extends credit terms of 45 days to its customers. Its credit collection would likely be considered poor if its average collection period was ________. A) 30 days B) 36 days C) 44 days D) 57 days
D
30) The federal regulatory body governing the sale and listing of securities is called the ________. A) IRS B) FASB C) GAAP D) SEC
D
33) The 2002 law that established the Public Company Accounting Oversight Board (PCAOB) was called ________. A) the McCain-Feingold Act B) the Harkins-Oxley Act C) the Sarbanes-Harkins Act D) the Sarbanes-Oxley Act
D
34) The ________ ratios are primarily used as measures of return. A) liquidity B) activity C) debt D) profitability
D
35) The stockholder's report includes ________. A) an estimated interest cost report B) an estimated dividend report C) a break-even sales report D) a statement of retained earnings
D
38) Gross profit is ________. A) operating profits minus depreciation B) operating profits minus cost of goods sold C) sales revenue minus operating expenses D) sales revenue minus cost of goods sold
D
40) Net profit after taxes is ________. A) gross profits minus operating expenses B) sales revenue minus cost of goods sold C) EBITDA minus interest D) EBIT minus interest and taxes
D
47) Retained earnings on the balance sheet represents the ________. A) net profit after taxes B) amount of proceeds in excess of the par value received from the original sale of common stock C) net profit after taxes minus preferred dividends D) cumulative total of all earnings reinvested in the firm
D
50) When preparing the retained earnings statement, ________ is(are) subtracted in order to derive at the ending balance of retained earnings. A) net profits after taxes B) interest expense C) depreciation D) dividends
D
6) In the DuPont system of analysis, the return on total assets (asset) is equal to ________. A) (return on equity) × (financial leverage multiplier) B) (return on equity) × (total asset turnover) C) (net profit margin) × (fixed asset turnover) D) (net profit margin) × (total asset turnover)
D
6) Two frequently cited ratios of profitability that can be read directly from the common-size income statement are ________. A) the earnings per share and the return on total assets B) the gross profit margin and the earnings per share C) the gross profit margin and the return on total assets D) the gross profit margin and the net profit margin
D
61) A firm's year-end retained earnings balance are $670,000 and $560,000 for 2014 and 2015, respectively. The firm reported net profits after taxes of $100,000 in 2015. The firm paid dividends of ________ in 2015. A) $10,000 B) $100,000 C) $110,000 D) $210,000
D
9) ________ ratio measures the proportion of total assets financed by the firm's creditors. A) Total asset turnover B) Inventory turnover C) Current D) Debt
D
1) Gross profit margin measures the percentage of each sales dollar left after a firm has paid for its goods and operating expenses.
FALSE
1) The Financial Accounting Standards Board (FASB) is the federal regulatory body that governs the sale and listing of securities.
FALSE
10) A single key ratio of a firm provides all the information required to judge the overall performance of the firm.
FALSE
10) The president's letter, the first component of the stockholders' report, is the primary communication from management to a firm's employees.
FALSE
11) Common stock dividends paid to stockholders is equal to the earnings available for common stockholders divided by the number of shares of common stock outstanding.
FALSE
11) Total asset turnover commonly measures the liquidity of a firm's total assets.
FALSE
13) The use of the unaudited financial statements for ratio analysis is preferable because it reflects the firm's true financial condition.
FALSE
14) Paid-in capital in excess of par represents a firm's book value received from the original sale of common stock.
FALSE
15) Market ratios only measure the risk.
FALSE
16) Profitability ratios capture both risk and return.
FALSE
17) Earnings per share results from dividing earnings available for common stockholders by the number of shares of common stock authorized.
FALSE
2) GAAP is the accounting profession's rule-setting body.
FALSE
2) The less fixed-cost debt (financial leverage) a firm uses, the greater will be its risk and return.
FALSE
22) The statement of cash flows reconciles the net income earned during a given year, and any cash dividends paid, with the change in retained earnings between the start and end of that year.
FALSE
24) A U.S. parent company's foreign equity accounts are translated into dollars using the historical rate or average rate based on the company's discretion.
FALSE
25) A U.S. parent company's foreign retained earnings are not adjusted for currency movements to reflect each year's operating profits or losses.
FALSE
3) Earnings per share represents the dollar amount earned and distributed to shareholders.
FALSE
3) In general, the more debt a firm uses, the smaller its financial leverage.
FALSE
3) The DuPont system allows a firm to break its return on equity into a profit-on-sales component, an efficiency-of-asset-use component, and a use-of-operating leverage component.
FALSE
3) The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they come due.
FALSE
4) Current ratio provides a firm's ability to meet its long-term obligations.
FALSE
4) The lower the fixed-payment coverage ratio, the lower is the firm's financial leverage.
FALSE
4) Time-series analysis is the evaluation of a firm's financial performance in comparison to other firm(s) at the same point in time.
FALSE
6) Average age of inventory can be calculated as inventory divided by 365.
FALSE
6) The Sarbanes-Oxley Act of 2002 established the Private Company Accounting Oversight Board (PCAOB) which is a for-profit corporation that oversees CEOs of public corporations.
FALSE
7) Average age of inventory can be calculated as inventory turnover divided by 365.
FALSE
7) Higher the value of the times interest earned ratio, higher is the proportion of the firm's interest income compared to its contractual interest payments.
FALSE
7) The McCain-Feingold Act of 2002 was passed to eliminate many of the disclosure and conflict-of-interest problems of corporations.
FALSE
7) Time-series analysis evaluates the performance of various firms at the same point in time using financial ratios.
FALSE
8) Benchmarking is a type of time-series analysis in which the firm's ratio values are compared to those of a key competitor or group of competitors, primarily to isolate areas of opportunity for improvement.
FALSE
8) Publicly owned corporations are those which are financed by the proceeds from the treasury securities.
FALSE
9) Average payment period can be calculated as accounts payable divided by average sales per day.
FALSE
21) The original price per share received by the firm on a single issue of common stock is equal to the sum of the common stock and paid-in capital in excess of par accounts divided by the number of shares outstanding.
TRUE
1) The basic inputs to an effective financial analysis are the firm's income statement and the balance sheet.
TRUE
1) The financial leverage multiplier is the ratio of a firm's total assets to common stock equity.
TRUE
1) The liquidity of a business firm refers to the solvency of the firm's overall financial position.
TRUE
1) The magnification of risk and return introduced through the use of fixed-cost financing, such as debt and preferred stock is called financial leverage.
TRUE
10) Average payment period can be calculated as accounts payable divided by average purchases per day.
TRUE
11) Due to inflationary effects, inventory costs and depreciation write-offs can differ from their true values, thereby distorting profits.
TRUE
12) In ratio analysis, the financial statements being used for comparison should be dated at the same point in time during the year. If not, the effect of seasonality may produce erroneous conclusions and decisions.
TRUE
12) The income statement is a financial summary of a firm's operating results during a specified period while the balance sheet is a summary statement of a firm's financial position at a given point in time.
TRUE
13) The common stock entry in balance sheet is the par value of common stock.
TRUE
14) The use of differing accounting treatments—especially relative to inventory and depreciation—can distort the results of ratio analysis, regardless of whether cross-sectional or time-series analysis is used.
TRUE
15) Earnings per share represents amount earned during the period on each outstanding share of common stock.
TRUE
16) Net fixed assets represent the difference between gross fixed assets and accumulated depreciation of fixed assets.
TRUE
17) The liquidity of a firm is measured by its ability to satisfy its short-term obligations as they come due.
TRUE
18) Retained earnings represent the cumulative total of all earnings, net of dividends, that have been retained and reinvested in the firm since its inception.
TRUE
19) The balance sheet is a statement which balances a firm's assets (what it owns) against its debt (what it owes) or its equity (what is provided by owners).
TRUE
2) Both current and prospective shareholders are interested in the firm's current and future level of risk and return, which directly affect share price.
TRUE
2) Net profit margin measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and common stock dividends, have been deducted.
TRUE
2) The DuPont formula allows a firm to break down its return into the net profit margin, which measures the firm's profitability on sales, and its total asset turnover, which indicates how efficiently the firm has used its assets to generate sales.
TRUE
2) The two basic measures of liquidity are the debt-to-equity ratio and the asset turnover ratio.
TRUE
20) The amount paid in by the original purchasers of common stock is shown by two entries in the firm's balance sheet—common stock and paid-in capital in excess of par on common stock.
TRUE
23) The statement of cash flows provides insight into a firm's operating, investment, and financing cash flows and reconciles them with changes in its cash and marketable securities during the period of concern.
TRUE
26) The Financial Accounting Standards Board (FASB) Standard No. 52 mandates that U.S.-based companies translate their foreign-currency-denominated assets and liabilities into dollars using the current rate (translation) method.
TRUE
3) Creditors are primarily interested in short-term liquidity of the company and its ability to make interest and principal payments.
TRUE
3) Generally accepted accounting principles are authorized by the Financial Accounting Standards Board (FASB).
TRUE
4) Return on total assets (ROA) measures the overall effectiveness of management in generating profits with its available assets.
TRUE
4) The Sarbanes-Oxley Act of 2002 established the Public Company Accounting Oversight Board (PCAOB) which is a not-for-profit corporation that oversees auditors of public corporations.
TRUE
5) Average age of inventory is viewed as the average length of time inventory is held by a firm or as the average number of days' sales in inventory.
TRUE
5) Cross-sectional analysis involves the comparison of different firms' financial ratios at the same point in time.
TRUE
5) Higher the debt ratio, more the financial leverage a firm has and thus, the greater will be its risk and return.
TRUE
5) The Sarbanes-Oxley Act of 2002 was passed to eliminate many of the disclosure and conflict-of-interest problems of corporations.
TRUE
5) The price/earnings (P/E) ratio represents the degree of confidence that investors have in a firm's future performance.
TRUE
6) Benchmarking is a type of cross-sectional analysis in which a firm's ratios are compared to a key competitor firm within the same industry, primarily to identify areas for improvement.
TRUE
6) Typically, higher coverage ratios are preferred, but a very high ratio may indicate under-utilization of fixed-payment obligations, which may result in unnecessarily low risk and return.
TRUE
8) Average age of inventory can be calculated as 365 divided by inventory turnover.
TRUE
9) Publicly owned corporations with more than $5 million assets are required by the Securities and Exchange Commission (SEC) and individual state securities commissions to provide their stockholders with an annual stockholders' report.
TRUE
9) Ratios merely direct an analyst to potential areas of concern and it does not provide conclusive evidence as to the existence of a problem.
TRUE
